Week 7: Quality Control, Inventory
Management - Discussions
Workout Room (graded)
This week, we will work several practice problems from Chapter 19: 19.27 to 19.38; and Chapter 20: 20.26 to 20.36
inclusive.
Responses
Response
Author
Week 7 Instructor Louviere
Date/Time
10/8/2011 9:41:56 AM
Class, I have a couple of problems to work on this week. But first, please define and give
examples of the following quality cost categories - prevention costs, appraisal costs,
internal failure costs, and external failure costs.
RE:
Week
7
Deyanira Barbosa
10/16/2011 1:46:30 PM
Quality Costs can be broken down into four categories:
Prevention Costs – reduce the number of defects.
Appraisal Costs- (known as inspection costs) identify defective products before
they are sold to consumers.
Internal Failure Costs- identifies defects before a product a shipped to a
customer.
External Failure Costs - warranty, repairs, or replacements; normally
encountered upon a defective product.
RE:
Elena Brechler
10/15/2011 7:11:05 PM
Week
7
internal failure costs-Costs incurred on defective products before they are
distributed. One example is a phone with a battery that does not last long and is
defective. The company has to go back and fix all the batteries before
distributing or shipping them.
RE:
Week
7
Lisa Marie Johnson
10/15/2011 3:04:10 PM
Based on our chapter 19 reading on the Financial Perspective: Costs of Quality,
the following definitions:
Prevention cost are incurred to preclude the production of products that do not
conform to specifications. Example of such cost is quality circles.
Appraisal costs are incurred to detect which of the individual units of products
do not conform to specifications. Example of such cost is an audit of the
effectiveness of a quality system.
Internal failure costs are incurred on defective products before they are shipped
to customers. Example of such cost is downtime due to quality problems.
External failure costs are costs incurred on defective products after they are
shipped to the customer. Example of such cost is warranty repairs.
RE:
Week Elena Brechler
7
10/16/2011 11:31:37 AM
Although prevention costs may be higher due to all the measures a
company has to take to ensure the product does what it is supposed to do
and functions the way it is supposed to, external costs in my opinion can
damage the business the most, financially. This is because the company
has to do warranty repairs, bring back the product, and most of all
because the customer may feel all of the company's products have
defects and may choose to never buy another product again or tell others
that the company's products are not worth the money.
RE:
Week
7
Alvin Larkins
10/13/2011 5:39:53 PM
prevention costs-costs incurred to preclude the production of products that do not conform to
specifications
Cost induced by actions taken to prevent defects.
appraisal costs-costs incurred to detect which of the individual units of products do not conform
to specifications.
Cost induced by actions to detect defects
internal failure costs-costs incurred on defective products before they are shipped to customers.
Cost incurred by rework, reinspect, scrap or anthing that happens before the
customer.
external failure costs-costs incurred on defective products after they are shipped to customers.
Cost incurred by warrenty claims, customer returns
RE:
Week
7
Samantha Lack
10/12/2011 10:50:32 PM
Definitions and examples




Prevention costs:Costs incurred to preclude the production of products that do not
conform to specifications. Testing of new materials before the production?
Appraisal costs: costs incurred to detect which of the individual units of products do
not conform to specifications. Product testing or inspections?
Internal failure costs: costs incurred on defective products before they are shipped to
customers. Scrap, or products that are have to be disposed of?
External failure costs: costs incurred on defective products after they are shipped to the
customer. Would a good example of this be when a car manufacturer does a recall and
has to fix something after the fact (ie..steering column)?
Works Cited
Horngren, C. T., Datar, S. M., Foster, G., Rajan, M., & Ittner, C. (2009). Cost
Accounting-A Managerial Emphasis. Upper Saddle River: Pearson Prentice Hall.
RE:
Week
7
Brandon Green
10/12/2011 10:14:19 PM
Prevention costs are the costs of items and/or services
designed to prevent a product or service not meeting
standards from coming to be at all. One example is
training people in a job as to the expectations,
processes, and requirements needed in order to meet
standards.
Appraisal costs are the costs of items and/or services
designed to find out what if any services or products are
not meeting standards. One example would be a quality
control inspector hired to inspect products and/or
services to make sure standards are being met.
Internal failure costs are the costs of items and/or
services needed to remedy a situation found to be in
error before it reaches customers. One example is the
time and/or materials needed to repair a defective
product or take someone aside for discipline, additional
training, retraining, etc. in order to try and get them to
meet standards.
External failure costs are the costs of items and/or
services needed to remedy a situation found to be in
error after it reaches customers. One example is having
to replace a defective product with another one likely
free of charge, or in the case of a service as one poster
mentioned (doing damage control) in an attempt to
regain a customer's confidence or satisfaction with the
service.
RE:
Week Dominique Fryer
7
10/12/2011 10:27:40 PM
Prevention costs and appraisal costs may be high, but the price of failed
product costs may be more than a company can put out. A reputation is
worth more than money can buy so paying to keep a good one doesn't
sound so bad. The companies that do this are the ones that are the most
successful. There are limits to the amount of money that should be
spent though. If too much is spent then there will be no profit and the
company will close anyway.
RE:
Week Craig Bemis
7
10/14/2011 8:10:39 AM
Good point, Dominique. Not spending money on these
measures could potentially cost the company much more in the
process. Many companies will have quality control
departments that will inspect the product at different stages of
production. The earlier in the process a problem is detected, the
less money and time a company will spend correcting it. Many
companies also become ISO certified to let their customers
know that they are serious about the quality of their product.
That certification may be the difference in a customer choosing
them over the competitor.
RE:
Week Brandon Green
7
10/16/2011 11:59:16
PM
I agree the earlier a problem is detected the better of
course you can always go overkill too. I like the idea of
quality circles in that respect. We used them at the
truss plant I used to work for. Qualifications do in a
sense help giving that sort of confidence that
something official was done to ensure quality. Again
though sometimes it depends on rather or not the
customer knows, cares, or thinks the certifications are
all that worthwhile.
RE:
Week Brandon Green
7
10/15/2011 11:40:58 PM
A good post Dominique. However, reputation is only as good
as how well it's known. For instance, I used to work for a Truss
Plant and not many people know a great deal about trusses
much less what a quality truss is. The Wood Truss Council of
America allows certain truss plants meeting certain quality
standards to attach "tags" to their trusses, and it usually
"justified," in a manner of speaking, a truss plant increasing the
costs of their trusses. The quality also speaks to a products
reputation. However, because not many people know what that
quality standard is they don't know the reputation, and often it
gets thrown out the window for the sake of going with the
cheapest product.
RE:
Week
7
Travis Carroll
10/12/2011 7:11:06 PM
Prevention costs support activities whose purpose is to reduce the number of
defects.
Appraisal costs, which are sometimes called inspection costs, are incurred to
identify defective products before the products are shipped to customers
Internal failure costs result from identification of defects before they are shipped
to customers. These costs include scrap, rejected products, reworking of
defective units, and downtime caused by quality problem.
retrieved from: Accountingformanagement
When a defective product is delivered to customer, external failure cost is the
result. External failure costs include warranty, repairs and replacements, product
recalls, liability arising from legal actions against a company, and lost sales
arising from a reputation for poor quality. Such costs can decimate profits.
RE:
Week
7
Michael Hayward
10/12/2011 5:29:43 PM
Prevention cost is a way for a company to prevent any defect cost or costs that
may exceed your original budget. An example or prevention cost Just in Time
system, where the parts are delivered just in time and with the set amount of
orders just in time so the supplier can deliver the product.
RE:
Week
Elena Brechler
10/12/2011 6:07:38 PM
7
Prevention costs-These are costs that are incurred in order to prevent a
product from having defects. One example can be quality planning and
another can be quality review. By this I mean that the company ensures
that the product is 100% and tests and re-tests.
RE:
Week Craig Bemis
7
10/15/2011 4:25:13 PM
Prevention costs apply not only in businesses, but in everyday life for
many things that we purchase. Many of us would not purchase a home
without having an appraisal done on it first. This would be a
preventative cost. We also have regular maintenance done on out cars,
such as changing oil and having tune ups. These are preventative costs
that can prevent future problems that will cost much more money.
RE:
Week
7
Ahmed Abdelrazig
10/11/2011 9:57:10 PM
Prevention costs are costs incurred to preclude the production of products that do
not conform to specifications. Appraisal costs are costs incurred to detect which
of the individual units of products do not conform to specifications. Internal
failure costs are costs incurred on defective products before they are shipped to
customers. External failure costs are costs incurred on defective products after
they are shipped to customers.
RE:
Week
7
Dawn Baker
10/11/2011 5:51:42 PM
Everybody has already answered this, however I will add Prevention Costs - costs that are incurred in order to prevent quality defects and poor quality.
Appraisal Costs - these are costs that are incurred as part of the quality control process in order
to ensure that products and services meet customer expectations and regulatory requirements.
Internal Failure Costs - costs incurred on defective products before they are shipped to
customers.
External Failure Costs - costs incurred on defective products after they have been shipped to
customers.
RE:
Week
7
Thomas Carter
10/11/2011 5:17:05 AM
Prevention costs are costs incurred to preclude the production of products that do not conform to
specifications. some examples would be design engineering , process engineering, equipment
preventive maintenance, quality training and similar categories.
Appraisal costs, are costs incurred to detect which of the individual units of products do not
conform to specifications, such as inspections, online product manufacturing and process
inspection, and product testing.
Internal failure costs are costs incurred on defective products before they are shipped to
customers, spoilage, rework, scrap and machine repairs.
External failure costs are costs incurred on defective products after they are shipped to
customers, customer support, warranty repair costs and liability claims are some examples.
RE:
Week
7
Patricia Neal-Williams
10/11/2011 7:53:08 AM
Prevention Costs are incurred to preclude the production of products that do not
conform to specifications, Examples are design engineering, quality training, and
testing of new products
Appraisal Costs are incurred to detect which of the individual units of products
that do not conform to specifications. Examples are inspections, Manufacturing
and processing inspection, and product testing
Internal Failure Costs are incurred on defective products before they are shipped
to the customer. Examples are rework, spoilage, scrap, machine repairs
External Failure Costs are incurred on defective products after they are shipped
to customers. Examples are warranty repair costs, liability claims, and customer
support
RE:
Week
Janet Knowlden
10/11/2011 9:00:49 AM
7
The following are examples of quality cost categories
1. Prevention costs are cost incurred as a preventive measure to reduce
production non-conformance as in verifying the design specifications
before going to the next phase.
2. Appraisal costs are costs incurred to detect non-conformance of products.
These costs would be related to having an inspection or quality control
department that makes sure the parts meet design or layout specifications.
3. Internal failure costs are costs related to the detection of failures before
the product is shipped to the customer, like in the case of a final
operational test or visual inspection before packaging.
4. External failure costs are costs incurred on defective products after they
are shipped to the customer. I see these cost as being related to returns of
defective parts or service calls to repair or replace defective parts.
RE:
Week
7
Richard Burger
10/11/2011 9:47:24 AM
- Prevention costs—costs incurred to preclude the production of products that
do not conform to specifications. These would include set-up, and calibration of
machinery, and training for employees.
- Appraisal costs—costs incurred to detect which of the individual units of
products do not conform to specifications. These would include inspection.
- Internal failure costs—costs incurred on defective products before they are
shipped to customers. These would include re-work, and scrap.
- External failure costs—costs incurred on defective products after they are
shipped to customers. These would include repair of returns, refunds or
replacement if necessary.
RE:
Week
7
Deborah Kieffer
10/10/2011 9:08:57 PM
1. Prevention Costs: Costs spent to avoid producing defective or nonconforming items or delivering bad service.
Examples: Training, automation, process improvement.
2. Appraisal Costs: Costs spent on inspection and detection of defective
products and sub-par service.
Examples: Quality inspectors, sampling, detection and measuring equipment.
3. Internal Failure Costs: Costs spent to correct defective products before
delivery to customers.
Examples: Rework, re-tooling, re-batching, environmental
4. External Failure Costs: Cost spent to correct defective products after
delivery to customers.
Examples: Warranties, product recalls, public relations (damage control)
RE:
Week
7




Daniel Arriagada
10/10/2011 5:52:26 PM
1. Prevention costs—costs incurred to preclude the production of
products that do not conform to specifications.
2. Appraisal costs—costs incurred to detect which of the individual units
of products do not conform to specifications.
3. Internal failure costs—costs incurred on defective products before
they are shipped to customers.
4. External failure costs—costs incurred on defective products after
they are shipped to customers
RE:
Week
7
Michael Coleman
10/10/2011 1:10:25 PM
Prevention Cost
Cost related to the activity of any hindrance in production or process approaches, quality planning, quality function
deployment, and/or complete quality enhancement
issues falling into a category of value adding activities. Most parts of a Six Sigma program is to prevent various types of
costs from raising.
These costs may include the cost of insuring a quality product using a QA, (Quality Assurance) department to implement
activities such as SPC, (statistical process control), quality inspections, gauge repeatability and reproducibility, and the
like.
Appraisal Costs are quality cost that determes the quality of a product. These costs are normally associated with
inspection. This includes inspection on receipt, inspection at the source.
Internal failure costs are those costs that are incurred as a result of identifying defective products before they are shipped
to customers.
External Failure Costs come from costs associated with defects that are found after the customer receives the product or
service. These costs included lost opportunities for sales revenue. Lost sales revenue costs would disappear if there were
no deficiencies. A category of quality costs incurred because products fail to conform to requirements after being sold to
customers. They include warranty costs, returns, and lost sales.
RE:
Week
7
Ellen LaChance
10/9/2011 6:54:23 PM
Prevention costs - are costs that prevent the production of a product that do not
conform to specifications. Examples of prevention costs are design
engineering,process engineering, supplier evaluations, testing of new materials,
quality training, etc.
Appraisal costs - are costs incurred to detect which of the individual units of
products do not conform to specifications. Examples of appraisal costs are
manufacturing inspection, product testing, etc.
Internal failure costs - are costs incurred on defective products before they are
shipped to customers. Examples of internal failure costs are spoilage, machine
repairs, scrap, etc.
External failure costs - are costs incurred on defective products after they are
shipped to customers. Examples of external failure costs are customer support,
warranty repair costs, liability claims, etc.
RE:
Week
7
Tyrone Labad
10/9/2011 6:56:14 PM
These are the definitions provided in the text.
Prevention costs – costs incurred to preclude the production of products that do
not conform to specifications. Examples: design engineering, supplier
evaluations, quality engineering
Appraisal costs - costs incurred to detect which of the individual units of
products do not conform to specifications. Examples: inspection, product testing
Internal failure costs – costs incurred on defective products before they are
shipped to customers. Examples: scrap, rework, spoilage
External failure costs – costs incurred on defective products after they are
shipped to customers. Examples: customer support, warranty repair, liability
claims
RE:
Week Tyrone Labad
7
10/9/2011 6:59:00 PM
I also found this source useful
http://www.accountingtools.com/cost-of-quality
1927
Instructor Louviere
10/9/2011 9:10:48 AM
Please place your work for this problem here.
RE:
1927

Daniel Arriagada
10/10/2011 6:08:43 PM
1. Suppose Thomas’s designers implement the new design. Should
Thomas accept Jackson’s order for 22,000 T971 valves? Show your
calculations.
1.
Thomas has capacity constraints. Demand for V262 valves (370,000
valves) exceeds production capacity of 330,000 valves (3 valves per hour 
110,000 machine-hours). Since capacity is constrained, Thomas will choose to
sell the product that maximizes contribution margin per machine-hour (the
constrained resource).
Contribution margin per machine hour for V262 = $8 per valve  3
valves per hour = $24
contribution margin per machine hour for T971 = $10 per valve  2
valves per hour = $20.
Thomas should reject Jackson Corporation’s offer and continue to
manufacture only V262 valves.

2. Should Thomas implement the new design? Show your calculations.
2.
The relevant costs of implementing the new design $(315,000)
Relevant benefits:
(a)
(b)
Savings in rework costs ($3a per V262 valve  30,000
valves)
90,000
Additional contribution margin from selling another
30,000 V262 valves (3 valves per hour  10,000 hours)
because capacity previously used for rework is freed up
($8
per
valve

30,000
units)
240,000
Net
benefit
$
relevant
15,000
Thomas should implement the new design since the relevant benefits
exceed the relevant costs by $15,000.

3. What nonfinancial and qualitative factors should Thomas consider in
deciding whether to implement the new design?
3.
Thomas Corporation should also consider other benefits of improving
quality. For example, the process of quality improvement will help Thomas's
managers and workers gain expertise about the product and the manufacturing
process that may lead to further cost reductions in the future. Improving quality
within the plant is also likely to translate into delivering better quality products
to customers. The increased reputation and customer goodwill may well lead to
higher future revenues through greater unit sales and higher sales prices.
RE:
1927
Stephanie McGrath
10/10/2011 7:14:41 PM
Here is my response to problem 19-27.
ACCT434_Workout Room.xlsx
RE:
19- Instructor Louviere
27
10/11/2011 1:07:01 AM
Comments?
19-27.docx
RE:
1927
Patricia Neal-Williams
10/11/2011 3:51:09 PM
Problem 19.27
1. Thomas has capacity constraints. Demand for V262 valves (370,000
valves) exceeds production capacity of 330,000 valves (3 valves per hour
 110,000 machine-hours). Since capacity is constrained, Thomas will
choose to sell the product that maximizes contribution margin per
machine-hour (the constrained resource).
$8 per valve X3 valves per hour=$24
$10 per valveX2 valves per hour=$20
Thomas should reject Jackson Corporation’s offer and continue to manufacture
only V262 valves.
2.
Relevant Cost of implementing new design
(315,000)
Relevant benefits:
a.
Savings in rework cost ($3per V262 valveX30,000 valves)
90,000
b. Additional contribution margin from selling another 30,000
V262 valves ($3per hour X10000 hrs) because capacity
previously used for rework is freed up ($8x30000 units)
NET Relevant Benefit
240,000
15,000
3. Thomas Corporation should also consider other benefits of improving
quality. Improving quality within the plant is likely to translate into delivering
better quality products to customers, and also with improved quality it will help
Thomas’ managers and workers gain valuable expertise about the product and
manufacturing process that may lead to reduction in costs.
RE:
1927
Michael Coleman
10/11/2011 7:41:29 PM
19.27 This is wrong but i am not totally finished with it yet.
1. Suppose Thomas’s designers implement the new design. Should Thomas
accept Jackson’s order for 22,000 T971 valves? Show your calculations.
1.
Thomas has capacity constraints. Demand for V262 valves (370,000
valves) exceeds production capacity of 330,000 valves (3 valves per hour ´
110,000 machine-hours). Since capacity is constrained, Thomas will choose to
sell the product that maximizes contribution margin per machine-hour (the
constrained resource).
Contribution margin per machine hour for V262 = $8 per valve ´ 3 valves per hour
= $24
contribution margin per machine hour for T971 = $10 per valve ´ 2 valves per hour
= $20.
I do believe that Thomas should reject Jackson Corporation’s offer and continue
to manufacture only V262 valves. Since they can make it for a better price.
2. Should Thomas implement the new design? Show your calculations.
2. The relevant costs of implementing the new design $(315,000)
Relevant benefits:
(a)
Savings in rework costs ($3a per V262 valve ´ 30,000
valves)
90,000
(b) Additional contribution margin from selling another
30,000 V262 valves (3 valves per hour ´ 10,000 hours)
because capacity previously used for rework is freed up
($8
per
valve
´
30,000
units)
240,000
Net
relevant
benefit
$ 15,000
Thomas should implement the new design since the relevant benefits exceed the
relevant costs by $15,000.
3. What nonfinancial and qualitative factors should Thomas consider in
deciding whether to implement the new design?
3.
Thomas Corporation needs to consider other benefits of improving
quality. As an example, the process of quality improvement should help
Thomas's managers and workers gain expertise about the product and the
manufacturing process that may lead to further cost reductions in the future.
Improving quality within the plant is also likely to translate into delivering better
quality products to customers. The increased reputation and customer goodwill
may well lead to higher future revenues through greater unit sales and higher
sales prices.
RE:
1927
Ahmed Abdelrazig
10/13/2011 11:04:48 PM
1. Taking into account the cont. marginsThe CM of each hour for v262 is $24 ($8 x 3 valves)
The CM of each hour for t971 is $20 ($10 x 2 valves)
> Thomas should reject the offer from Jacksons and make the v262
which yields a higher CM.
RE:
1927
10/15/2011 1:32:00 PM
Richard Burger
1
V262
T971
CM per valve
$8
$10
Valves per MH
3
2
CM per MH
$24
$20
Thomas should reject Jackson's propsal and only make V262 valves.
2
Relevant costs of
new design
Savings in
rework ($3 per
V262 * 30,000)
Increased revenue
due to freed up
capacity ($8
*30,000)
Total
($315,000)
90000
240000
330000
Net relevant
$15,000
benefit
Thomas should implement the new design because the net relevant benefit
exceeds the relevant costs by $15,000.
19-27.xlsx
RE:
1927
10/15/2011 10:31:43 PM
Travis Carroll
Question 1
Contribution margin
per machine hour
$20
Contribution margin
per machine hour
$24
Question 2
Net relevant benefit
(330,000-315,000)
15,000
Question 3
Thomas should consider nonfinacial measures of
customer satisfaction
1928
Instructor Louviere
10/9/2011 9:11:22 AM
Please place your work for this problem here.
RE:
Michael Hayward
10/14/2011 9:42:12 PM
1928
19-28
b Contribution
margin per unit
Selling
price
$40.00
Variable costs:
Direct materials costs per lamp
$16.00
Molding department variable manufacturing costs
per lamp (direct manufacturing labor, setup labor, and
materials handling labor)
3.00
Variable
costs
(19.00)
Unit
contribution
margin
$21.00
On the basis of quantitative considerations alone, Tan should use the new
material. Relevant benefits of $1,200,000 exceed the relevant costs of $800,000
by $400,000.
Improve employee morale because of higher quality
RE:
1928
Ellen LaChance
10/10/2011 5:21:05 PM
19-28
1. Yes, Tan should use the new material. The potential revenue selling 200,000 units at $40/unit
is $8,000,000. If Tan keeps production using the current materials, they are losing $1,200,000 in
revenue, bringing the total annual revenu to $6,800,000. Taking into consideration the new
material with additional costs equalling $800,000 ($4 x 200,000), the annual revenue would
equal $7,200,000 ($8,000,000 - $800,000). You would increase your annual revenues by
$400,000.
2. The non-financial and qualitative factors Tan should consider in their decision making process
would be the percentage of defective units produces and their customer satisfaction level.
RE:
19- Instructor Louviere
28
10/11/2011 1:07:53 AM
Comments?
19-28.docx
RE:
19- Michael Coleman
28
10/12/2011 8:19:04 PM
I am similar to youon question 1 i believe according to my results i
believe he can go either way. The new material maybe the best way to
go but not always. There is a possible loss of revenue if he does not use
the new materal the loss ia about 1,000,000 and the revenue increase is
300,000 so i guess iwould chose to use the new materials.
on question 2 i believe that the non-financial aspect should be customer
satisfaction and customer determints. the customer has a view of their
product if they designedit and if not they know what they need and don't
need. The customer is relying on the manufactorer to the direction that
the customer has directed. if the manufactorer or supplier does not make
the customer happy the customer will go somewhere else were someone
will do what they are ased to do.
1929
Instructor Louviere
10/9/2011 9:11:43 AM
Please place your work for this problem here.
RE:
1929
Janet Knowlden
10/11/2011 10:09:28 AM
Spirit of
Spirit of
Spirit of
Atlanta
Boston
Sacramento
Flight (gallon-units) (gallon-units) (gallon-units)
1
208
206
194
2
187
188
208
3
194
192
221
4
202
214
208
5
211
184
242
6
215
226
234
7
216
198
249
8
218
212
227
9
221
202
232
10
232
186
244
1. Using the ±2σ rule, what variance-investigation decisions would be made?
Investigate any round-trip with fuel consumption that is greater than two standard deviations
from the mean.
According to the textbook, it looks like a chart should be developed to calculate the variance, I
don't remember how to set this up in excel, but will figure it out. Stay tuned.
RE:
19- Instructor Louviere
29
10/12/2011 1:58:06 AM
Comments?
19-29.docx
RE:
19- Janet Knowlden
29
10/12/2011 1:45:18 PM
I spent hours going through statistics books and every accounting book I have and this was as
far as I could get. Just getting to the point of understanding what was presented in the graph
on page 671 Exhibit 19-3 was not easy. That graph had to done by hand because I could get
Excel to repeat it to save my life.
Spirit of Atlanta
(gallon-units)
Spirit of Boston
(gallon-unit)
Spirit of Sacramento
(gallon-unit)
1
208
206
194
12-month mean µ (average) round-trip fuel consumption (gallon-units)
2
187
188
208
200
Flight
3
194
192
221
Standard deviation σ (gallons-units)
4
202
214
208
20
5
211
184
242
A gallon-unit (gallons)
6
215
226
234
1,000
7
216
198
249
µ ± 2σ
8
218
212
227
±2σ (plus or minus 2 times the standard deviation of 20) =
9
221
202
232
10
232
186
244
Min
187
184
194
Max
232
226
249
Average (mean µ) fuel flow is 200 gallons, minus 40 gallons equals the minimum fuel us
usage. Anything above or below is cause for investigation.
Max fuel consumption
240
Min fuel consumtion
160
µ + 2σ
240
µ+σ
220
µ
200
µ-σ
180
µ - 2σ
160
RE:
19- Travis Carroll
29
10/16/2011 6:41:25 PM
Janet, That seems to look perfect to me. i was able to
stay tuned and find out whether you remembered how
to use the excel workbook, apparently you remembered
because this looks great now only if I can figure this
out using excel!! Thanks
1930
Instructor Louviere
10/9/2011 9:12:04 AM
Please place your work for this problem here.
RE:
1930
Lisa Marie Johnson
4
10/10/2011 11:58:22 AM
Compensation linked with profitability, on-time delivery and external qualityperformance measures.
19-30: Question 1.
January-June
July-December
Philadelphia
Operating income
Add profitability performance (1% of operating
income
Average waiting time
Add average waiting time (<15 mins = $50,000)
Patient satisfaction
Deduct patient satisfaction (<70 = $50,000)
Bonus
$10,650,000.00
$10,600,000.00
$106,500.00
$106,000.00
14 minutes
$50,000.00
79
$$ 156,500
16 minutes
$82
$$ 106,000
Los Angeles
$9,000,000.00
Operating income
Add profitability performance (1% of operating
$90,000.00
income
Average waiting time
17 minutes
Add average waiting time (<15 mins = $50,000) $Patient satisfaction
66
Deduct patient satisfaction (<70 = $50,000)
Bonus
RE:
19- Instructor Louviere
30
$(50,000.00)
$40,000.00
$950,000.00
$9,500.00
14.5 minutes
$50,000.00
70
$$59,500.00
10/11/2011 1:08:37 AM
Comments?
19-30.docx
RE:
19- Dominique Fryer
30
10/16/2011 8:41:19 AM
This information looks good the way you set it up Lisa. It was easy to
understand. I think that everything is right. The only question I have is
at the very bottom where it say to deduct the patient satisfaction bonus if
under 70. I don't see where the patient satisfaction was added to it in the
first place. You get the profitability performance bonus plus the waiting
time bonus but then it says don't deduct the patient satisfaction because
it is not less then 70 but it was never added to it. Does this mean that
you should add it in then. That would mean that you should have
$109,500.00 as the ending bonus for LA in July through December.
RE:
1930
10/15/2011 10:26:52 PM
Ahmed Abdelrazig
PHI 1st half of the year:
Bonus paid = 1% of profitability + 50k (waiting time) = 106500 + 50k =
$156500
2nd half of the year:
Bonus paid = 1% of profitability = $106k
BAL 1st half of the year:
Bonus paid = 1% of profitability - 50k (satisfaction) = 90k - 50k = $40k
2nd half of the year:
Bonus paid = 1% of profitability + 50k (waiting time) = 9500 + 50k = $59500
19.31
10/10/2011 1:43:29 AM
Kanchi Patel
1. Calculate
a. The average amount of time that an order for Z39 will
wait in line before it is processed
AOWT =
(Average Annual Orders Expected) X (AOMT) X (AOMT)
2 X (Annual Mach. Capacity - (Average Annual Orders Expected X AOMT))
AOWT =
(50) X (80) X (80)
2 X (5,000 - (50 X 80))
AOWT =
320,000 / (2 X (5,000 - 4,000))
AOWT =
320,000
2,000
AOWT =
b.
160
hours per order
The average manufacturing lead time per order for Z39.
AMLT = AOWT + AOMT
AMLT = 160 + 80 = 240 hours
2. SRG is considering introducing a new product, Y28. SRG
estimates that, on average, it will receive 25 orders of Y28
(each order for 200 units) in the coming year. Each order
of Y28 will take 20 hours of machine time. The average
demand for Z39 will be unaffected by the introduction of
Y28.
Calculate
a. The average waiting time for an order received and
AOWT =
(Average Annual Orders of Z39) X (AOMT) X (AOMT) + ( Average Annual Orders of Y28) X (AOMT) X (AOMT)
2 X [Annual Mach. Capacity - [(Annual orders expected Z39 X AOMT)] - [(Annual orders expected Y28) X (AOMT)]]
AOWT =
(50 X 80 X 80) + (25 X 20 X 20)
2 X [(5,000 - (50 X 80) - (25 X 20))]
AOWT =
330,000
1,000
AOWT =
330
hours
b. The average manufacturing lead time per order for
each product, if SRC introduces Y28.
Z39
AMLT = AOWT + AOMT = 330 + 80 = 410 hours
Y28
AMLT = AOWT + AOMT = 330 + 20 = 350 hours
RE:
19.31
10/11/2011 6:35:52 PM
Freddy Rodriguez
1. Average waiting time for an order of Z39…
= [50 × (80)2] / 2 × [5,000 – (50 × 80)]
= (50 × 6,400) / 2 × (5,000 – 4,000)
= 320,000 / (2 × 1,000)
= 160 hours per order
Average manufacturing
Average order waiting
Order
manufacturing time
lead time for Z39
=
time for Z39
+
for Z39
= 160 hours + 80 hours = 240 hours per order
2. Average waiting time for Z39 and Y28…
[50 × (80)2 ] + [25 × (20) 2]
10,000)
2 × [5,000 – (50 × 80) – (25 × 20)]
500
[(50 × 6,400) + (25 × 400)]
(320,000 +
2 × [5,000 – 4,000 – 500]
2×
= 330 hours
= +
=
=
330 hours + 80 hours = 410 hours
+
= 330 hours + 20 hours = 350 hours
1934
Tyrone Labad
10/10/2011 7:26:30 PM
1.
I think that Colorado Industries should not implement the new manufacturing
method.
It will cost Colorado $50 per unit to reduce manufacturing time; however,
manufacturing is not a bottleneck operation; installation is. Manufacturing more
equipment will not increase sales and throughput contribution.
2.
Additional relevant costs of new direct materials ($2,000  320 units)
$640,000
Increase in throughput contribution
($25,000  20 units)
$500,000
The additional incremental costs exceed the benefits from higher throughput contribution
by $140,000 ($640,000-500,000), so Colorado Industries should not implement the new
design.
The current throughput contribution is greater $7,500,000(25,000 x 300) than the
throughput contribution resulting from the modification 7,360,000($23,000 x 320) in direct
materials. Therefore, Colorado Industries should not implement the new design.
Increase in throughput contribution, $25,000  10 units
3.
$250,000
Increase in relevant costs
$
50,000
Excess incremental costs
$200,000
Colorado Industries should implement the new installation technique.
4.
It would not be a good idea to evaluate and compensate manufacturing workers
on the basis of their productivity. Manufacturing is not a bottleneck operation, so any
increase in output will result only in extra inventory of equipment. The company should
focus on manufacturing to produce enough equipment that installation department may
need.
RE:
1934
Instructor Louviere
10/14/2011 8:55:11 AM
Comments? Approaches?
19-34.docx
19.32
Instructor Louviere
10/11/2011 1:09:48 AM
Please place your work and comments for this problem here.
RE:
Patricia Neal-Williams
10/13/2011 5:28:22 AM
19.32
Problem 19.32
1.
The direct approach is to look at incremental revenues and incremental costs.
Selling price per order of Y28, which has an average
manufacturing lead time of 350hrs.
8,000
Variable cost per order
5,000
Additional contribution per order of Y28
3,000
Multiplied by expected number of orders
x25
Increase in expected contribution from Y28
75,000
Expected loss in revenue
Expected increase in carrying
Expected loss in
From increasing Average
increases in
costs from increasing average
plus expected
revenue
Manufac. Lead time for
Manufac. Lead time for all
introducing Product
All products
all products
Y28
(1)
Z39
(2)
25,000
Y28
Total
25,000
(3)
carrying costs of
(4)=(2)+(3)
6,375
31,375
2,187.50
2,187.50
8,562.50
33,562.50
Z39 50 orders x(27,000-26,500)=50x500=25,000 Expected loss
Z39 (410-240hrs)x 0.75x50 orders=6,375
Y28(350hrs-0)x .25x25=2,187.50
Increase in expected contribution from Y28 of $75,000 is greater than increase in expected
costs of $33,562 by $41,437.50. Therefore, SRG should introduce Y28.
Alternative
Revenue-&
Introduce Y28
Not introduce Y28
Relevant
Relevant costs
Expected Revenues
1,525,000
1,350,000
175,000
Expected variable costs
875,000
750,000
125,000
Expected inv. Carrying costs
17,562.50
9,000
8,562
Expected Total costs
892,562.50
759,000
133,562.50
Expected revenues-Expected costs
632,437.50
591,000
41,437.50
(50x26500)+(25x8000)=1,525,000
(50x27000)=1,350,000
(50x15000)+(25x5000)=875,000
(50x15000)=750,000
(50x.75x410)+(25x.25x350)=17,562.50 (50x.75x240)=9,000
2.
Selling price per order of Y28, which has average manufacturing
Lead time of more than 320 hours
6,000
Variable cost per order
5,000
Add. Contribution per order of y28
1,000
Multiplied by number of orders
x25
Increase in expected contribution from Y28
25,000
Expected loss in revenue
Expected increase in carrying
Expected loss in
From increasing Average
increases in
costs from increasing average
plus expected
revenue
Manufac. Lead time for
Manufac. Lead time for all
introducing Product
All products
all products
Y28
Z39
31,375
25,000
Y28
2,187.50
carrying costs of
6,375
2,187.50
Total
33,562.50
25,000
8.562.50
50 orders X(27000-26500)=25,000
(410-240)x.75x50 orders=6,375
(350 hrs-0)x.25x25=2,187.50
Increase in expected contribution from Y28 of $25,000 is less than increase in expected costs
of $33,562.50 by $8,562.50. Therefore, SRG should not introduce Y28.
RE:
19.32
Stephanie McGrath
10/12/2011 6:54:15 PM
Here is my response to the first part of problem 19-32.
ACCT434_Workout Room.xlsx
RE:
19.32 Instructor Louviere
10/13/2011 2:28:12 PM
Comments? Short cuts?
19-32.docx
RE:
19.32 Stephanie McGrath
10/14/2011 8:11:54 PM
The first time I tried to complete this problem I was completely stumbled. I am not sure
how any short cut could be implemented and I can’t find anything in our text book.
Your solution as always helped me figure out the changes in the problem should be
calculated.
Expected
loss in
rev +
expected
increase
Expected
Expected increase
in
loss in
in carrying costs
carrying
revenue
for all products
costs
25,000
6,375
31,375
2,187.50
2,187.50
Product
Z39
Y28
25,000
8,562.50
50*(27000-26500)
(410-240)*.75*50
(350-0)*.25*25
Expected costs are higher than the increase in expected contribution
33562.5-25000
8,652.50
So they should not introduce Y28
19.33
Instructor Louviere
10/11/2011 1:10:18 AM
33,562.50
Please place your work and comments for this problem here.
RE:
19.33
Alvin Larkins
10/11/2011 7:11:36 PM
1. Calculate the average manufacturing lead times per order (a) if Brandt manufactures only
B7 and (b) if Brandt manufactures both B7 and A3.
a.
[125x(40)^2]/{2x[6000-(125x40)]}=100 hours for B7
b.
{[125x(40)^2]+[10*50^2]}/{2x[6000-(125x40)-(10*50)]}=225 hours for B7 and
A3
2. Even though A3 has a positive contribution margin, Brandt’s managers are evaluating
whether Brandt should (a) make and sell only B7 or (b) make and sell both B7 and A3.
Which alternative will maximize Brandt’s operating income? Show your calculations.
a.
(125*15000)-(125*10000)-(0.5*100)=$624,950 B7 only
b.
(15,000+13,500)-19,000-(225*.45)=663,838.8 B7 and A3
By making B7 and A3 Brandt increases their income by $44,948.75. To maximize Brandt’s
operating income they should make both B7 and A3.
3. What other factors should Brandt consider in choosing between the alternatives in
requirement 2? Brandt should consider the cost associated with producing B7, and also the
manufacturing lead time associated with B7
RE:
19.33 Instructor Louviere
10/14/2011 8:54:11 AM
Comments? Approaches?
19-33.docx
1935
Kanchi Patel
10/11/2011 4:39:28 PM
Exercise 19-35
Given:
Aardee Industries manufactures pharmaceutical products in two departments:
Mixing
Tablet
Making
Measurement units
Capacity per hour (grams; tablets)
Monthly capacity (2,000 hours available per department)
Monthly production of good units
Fixed operating costs
Fixed operating costs per unit (grams; tablets)
DM costs; all incurred in the Mixing Department
% of the DM mixture lost in the tablet-making process
Grams of DMs needed per tablet
Selling price per tablet
All costs other than DM dollars are fixed
grams
150
300,000
200,000
$16,000
$0.08
$156,000
tablets
200
400,000
390,000
$39,000
$0.10
2.50%
0.50
$1
The Mixing Department makes 200,000 grams of DM mixture (enough to make
400,000 tablets) because the Tablet-Making Department has only enough capacity
to process 400,000 tablets.
Required:
1. If Aardee will supply a contractor with 10,000 grams of mixture, the contractor
will manufacture 19,500 tablets for Aardee (allowing for the normal 2.5% loss
during the tablet-making process) at $.12 per tablet. Should Aardee accept
the contractor's offer?
19,500
Tablet-making is a bottleneck -- supplying the DM mixture and paying for external
tablet processing will generate additional throughput contribution of
Selling price per tablet
$1
DM costs per tablet
0.40
Outside contracting cost per tablet
0.12
Throughput contribution per tablet purchased
$0.48
Benefit if Aardee accepts the outside contractor's offer
$9,360
2. Another company offers to prepare 20,000 grams of mixture a month from
DM that Aardee supplies. The company will charge $.07 per gram of mixture.
Should Aardee accept the company's offer?
The mixing operation is not a bottleneck.
Buying extra mixture will not increase throughput contribution or decrease the
cost of obtaining the mixture since the mixing operations has no avoidable costs.
Recommendation: Reject the offer.
3. Aardee's engineers have devised a method that would improve quality in the
tablet-making operation. They estimate that the 10,000 tablets currently being
lost would be saved. The modifications would cost $7,000 a month.
Should Aardee implement the new method?
Tablet-making is a bottleneck operation.
The quality program will increase sales revenue by (no change in VC)
Monthly incremental cost of the quality program
Advange of the modifications
$10,000
7,000
$3,000
Recommendation: Implement the new methods
4. Suppose that Aardee also loses 10,000 grams of mixture in its mixing operation.
These losses can be reduced to zero if the company is willing to spend $9,000
per month in quality-improvement methods.
Should Aardee adopt the quality-improvement method?
Cost savings from quality programs (cost of previously lost mixture)
Cost of the quality program
Disadvantage of the quality-improvement
$7,800
9,000
($1,200)
Recommendation: Do not Implement the new quality-improvement method.
5. What are the benefits of improving quality at the mixing operation compared with
improving quality at the tablet-making operation?
The benefit of improving quality of the mixing operation is the savings in materials costs
less the cost of the improvement program.
The benefit of improving quality of the tablet-making operation (the bottleneck operation)
is the increased sales revenue less the cost of the improvement program.
RE:
1935
Instructor Louviere
10/14/2011 8:56:38 AM
Comments? Approaches?
19-35.docx
RE:
19- Deborah Kieffer
35
TABLET MAKING
Capacity/hr: 200 tablets
Monthly Capacity: 400,000 tablets
Monthly Production: 390,000 tablets
Fixed Operating Costs: $39,000
Fixed Operating Costs/Tablet: .10
Direct Material Cost: $156,000
10/15/2011 11:58:52 PM
Proposed Qty: 19,500
Loss from Processing: 2.5% of mixture
Current Selling Price: $1
Proposed Price: .12
1. DM to produce 390,000 tablets = $156,000
DM per tablet: $156,000/390,000 = .40 per tablet
Current Selling Price: $1
Selling Price ($1) - Unit DM Costs (.40) = Unit Throughput
Contribution (.60 per tablet)
Since tablet-making appears to be a bottleneck operation with excess
capacity, producing the proposed 19,500 more tablets will create
additional operating income:
Unit Throughput Contribution (.60) - Additional Operating costs per
Tablet (.12) = Additional Operating Income per Tablet (.48)
Increase in Operating Income per Unit (.48) x Total Proposed Units
(19,500) = Increase in Operating Income ($9,360).
Aardee should accept the additional work.
RE:
19- Freddy Rodriguez
35
10/14/2011 4:51:34 PM
19-35 Theory of constraints, throughput contribution, quality, relevant
costs.
1. Selling price per tablet = $1.00
DM costs per tablet = = $0.40 per tablet
Additional operating incomeper contractor-made tablet = Unit
throughputcontribution – Additional operatingcosts per tablet
= $0.60 – $0.12 = $0.48
19,500 = $9,360. Therefore, IIncrease in operating income, $0.48
believe that Aardee should accept the outside contractor's offer.
2. Mixing more direct materials will have no effect on throughput
contribution, since tablet making is the bottleneck operation. Therefore,
I believe that Aardee should reject the company's offer.
3. The benefit of improved quality is $10,000. Aardee is using the same
quantity of direct materials as before, so it incurs no extra direct
materials costs. The 10,000 extra tablets produced generate additional
revenue of $10,000 a month. The modification costs $7,000 per month,
which results in a net gain of $3,000. Therefore, I believe that Aardee
should implement the new method.
4. Benefit from better mixing quality $7,800 per month
Cost of improving the mixing operation $9,000 per month
($1,200)
Since the costs exceed the benefits by $1,200 per month, Therefore, I
believe that Aardee should not adopt the proposed quality improvement
plan.
5. The benefit of improving quality at the mixing operation is the
savings in materials costs. The benefit of improving quality of the
tablet- making department (the bottleneck operation) is the savings in
materials costs plus the additional throughput contribution from higher
sales equal to the total revenues that result from relieving the bottleneck
constraint.
Cost of
Quality
Craig Bemis
10/11/2011 6:13:20 PM
Prevention costs and appraisal costs are a couple of examples of cost of quality
categories.
Prevention costs are investments made ahead of time in an effort to ensure conformance
to requirements. Some examples of prevention costs are orientation and training for
employees and the development of policies and procedures for a project.
Appraisal costs are incurred to identify defects after the fact. Some examples would
include testing and walk-throughs.
1936
1.
Tyrone Labad
10/11/2011 8:20:15 PM
Molding
Assembly
Department
Department
Chatty Chelsey
=30,000lbs/1.5lbs 8,400hrs/1/3hrs
=20,000
=25,2000
Talking Tanya
=30,000lbs/2lbs
8,400/1/2
=15,000
16,800
The constraining resource for both dolls is the availability of material. If only Chatty Chelsey
is produced, LTT can produce 20,000 dolls with a contribution margin of 20,000 × $16 =
$320,000.
If only Talking Tanya is produced, LTT can produce 15,000 dolls with a contribution margin
of 15,000 × $19 = $285,000. The company should produce Chatty Chelseys.
Contribution Margin (Chatty Chelsey) = $35 – 1.5 x 10 – 1/3 x 12
= $16
Contribution Margin (Talking Tanya) = $45 – 2 x $10 – ½ x 12
= 19
2. If LTT sells two Chatty Chelseys for each Talking Tanya, then the maximum number of
Talking Tanya dolls the Molding Department can produce (where the number of Talking
Tanya dolls is denoted as T) is:
(T × 2 lbs.) + ([2 × T] × 1.5 lbs.) = 30,000 lbs.
2T + 3T = 30,000
5T = 30,000
T = 6,000
The Molding Department can produce 6,000 Talking Tanya dolls, and 2 × 6,000 (or 12,000)
Chatty Chelsey dolls.
Maximum Contribution Margin = 12,000 × $16 + 6,000 × $19
= $306,000
3. (T × 2 lbs.) + ([2 × T] × 1.5 lbs.) =10 lbs.
2T + 3T = 10
T=2
LTT would produce 2 extra Talking Tanya dolls and 4 extra Chatty Chelsey dolls.
Contribution margin would increase by = 4 × $16 + 2 × $19
= $102
4. With 10 more labor hours, production would not change. The limiting constraint is pounds
of material, not labor hours. LTT already has more labor hours available than it needs.
RE:
1936
Daniel Arriagada
Molding Department
Department
Contribution MArgin
Chatty Chelsey
30,000lbs = 20,000
25,200
$35 - 1.5 x $10 -1/3 x $12 = $16
1.5 lbs
10/12/2011 7:29:12 PM
Assembly
8,400 hours =
1/3 hours
Talking Tanya
30,000 lbs = 15,000
8,400 hours =
16,800
$45 -2 x $10 -1/2 x $12 = $19
2lbs
1/2 hours
For both types of dolls, the constraining resource is the availability of material since this
constraint causes the lowest maximum production.
If only Chatty Chelsey is produced, LTT can produce 20,000 dolls with a contribution margin
of 20,000 × $16 = $320,000
If only Talking Tanya is produced, LTT can produce 15,000 dolls with a contribution margin
of 15,000 × $19 = $285,000.
LTT should produce Chatty Chelseys.
2. As shown in Requirement 1, available material in the Molding department is the limiting
constraint.
If LTT sells two Chatty Chelseys for each Talking Tanya, then the maximum number of
Talking Tanya dolls the Molding Department can produce (where the number of Talking
Tanya dolls is denoted as T) is:
(T × 2 lbs.) + ([2 × T] × 1.5 lbs.) = 30,000 lbs.
2T + 3T = 30,000
5T = 30,000
T = 6,000
The Molding Department can produce 6,000 Talking Tanya dolls, and 2 ×
6,000 (or 12,000) Chatty Chelsey dolls.
Since LTT can only produce 6,000 Talking Tanyas and 12,000 Chatty Chelseys before it runs
out of ingredients, the maximum contribution margin (CM) is:
CM = 12,000 × $16 + 6,000 × $19
= $306,000
3. With 10 more pounds of materials, LTT would produce more dolls. Using the same
technique as in Requirement 2, the increase in production is:
(T × 2 lbs.) + ([2 × T] × 1.5 lbs.) =10 lbs.
2T + 3T = 10
T=2
LTT would produce 2 extra Talking Tanya dolls and 4 extra Chatty Chelsey dolls.
Contribution margin would increase by
4 × $16 + 2 × $19 = $102
4. With 10 more labor hours, production would not change. The limiting constraint is pounds
of material, not labor hours. LTT already has more labor hours available than it needs.
RE:
19- Instructor Louviere
36
Comments? Approaches?
10/15/2011 5:48:07 AM
19-36.docx
2026
10/12/2011 12:47:00 PM
Kanchi Patel
Effect of different order quantities on ordering costs and carrying costs,
EOQ.
1.
Scenario
1
2
3
4
5
234,0 234,00 234,00 234,00 234,00
Demand (units) (D)
Cost per purchase order (P)
Annual carrying cost per package (C)
Order quantity per purchase order (units) (Q)
00
0
0
0
0
$
$
$
$
$
81.00
81.00
81.00
81.00
81.00
$
$
$
$
$
11.70
11.70
11.70
11.70
11.70
900
1,500
1,800
2,100
2,700
0 156.00 130.00 111.43
86.67
260.0
Number of purchase orders per year (D Q)
$21,0 $12,63 $10,53
Annual ordering costs (D Q) P
0
$
$
9,026
7,020
60
6
$
$
Annual carrying costs (QC 2)
5,265
8,775
Total relevant costs of ordering and carrying
inventory
$26,3 $21,41 $21,06 $21,31 $22,81
25
1
0
1
5
$10,53 $12,28 $15,79
0
5
5
The economic order quantity is 1,800 packages. It is the order quantity at which carrying
costs equal ordering costs and total relevant ordering and carrying costs are minimized.
We can also confirm this from direct calculation. Using D = 234,000; P = $81 and C =
$11.70
EOQ = = 1,800 packages
It is interesting to note that Koala Blue faces a situation where total relevant ordering and
carrying costs do not vary very much when order quantity ranges from 1,500 packages to
2,700 packages.
2.
When the ordering cost per purchase order is reduced to $49:
EOQ = = 1,400 packages
The EOQ drops from 1,800 packages to 1,400 packages when Koala Blue’s ordering cost per
purchase order decreases from $81 to $49.
And the new relevant costs of ordering inventory = = = $8,190
and the new relevant costs or carrying inventory = = = $8,190
The total new costs of ordering and carrying inventory = $8,190 2 = $16,380
3.
As summarized below, the new Mona Lisa web-based ordering system, by
lowering the EOQ to 1,400 packages, will lower the carrying and ordering costs by $4,680.
Koala Blue will spend $2,000 to train its purchasing assistants on the new system. Overall,
Koala Blue will still save $2,680 in the first year alone.
Total relevant costs at EOQ (from Requirement 2)
$16,380
Annual cost benefit over old system ($21,060 – $16,380)
$ 4,680
Training costs
Net benefit in first year alone
19-30
Question 1
Thomas Carter
2,000
$ 2,680
10/12/2011 12:50:53 PM
January - June
July - December
Philadelphia
Operating Income
$10,650,000
$10,600,000
Average Waiting Time (minutes)
14
16
Patient Satisfaction
79
82
Baltimore
Operating Income
$9,000,000
$950,000
Average Waiting Time (minutes)
17
14.5
Patient Satisfaction
66
70
Philadelphia
Add Profitability Performance (1% of Operating Income)
$106,500
$106,000
Add Average Waiting Time $50,00 < 15 min
$50,000
$0.00
Deduct Patient Satisfaction $50,000 < 70
$0.00
$0.00
Total Bonus Paid
$156,500
$106,000
Baltimore
Add Profitability Performance (1% of Operating Income)
$90,000
$9,500
Add Average Waiting Time $50,00 < 15 min
$0.00
$50,000
Deduct Patient Satisfaction $50,000 < 70
($50,000)
$0.00
Total Bonus Paid
$40,000
$59,500
19.34
Freddy Rodriguez
10/12/2011 3:19:47 PM
It will cost Colorado $50 per unit to reduce manufacturing time. Therefore,
manufacturing more equipment will not increase sales and throughput contribution.
Colorado Industries should not implement the new manufacturing method.
2.
Additional relevant costs of new direct materials, $2,000 ´ 320 units,
$640,000
Increase in throughput contribution, $25,000 ´ 20 units,
$500,000
1.
The additional incremental costs exceed the benefits from higher throughput contribution by $140,000, so
Colorado Industries should not implement the new design.
Alternatively, compare throughput contribution under each alternative.
Current throughput contribution is $25,000 ´ 300
With the modification, throughput contribution is $23,000 ´ 320
$7,500,000
$7,360,000
The current throughput contribution is greater than the throughput contribution resulting from the proposed
change in direct materials. Therefore, Colorado Industries should not implement the new design.
3.
Increase in throughput contribution, $25,000 ´ 10 units
$250,000
Increase in relevant costs
$ 50,000
The additional throughput contribution exceeds incremental costs by $200,000, so Colorado Industries
should implement the new installation technique.
4.
Motivating installation workers to increase productivity is worthwhile because installation is a
bottleneck operation, and any increase in productivity at the bottleneck will increase throughput
contribution. On the other hand, motivating workers in the manufacturing department to increase
productivity is not worthwhile. Manufacturing is not a bottleneck operation, so any increase in output will
result only in extra inventory of equipment. Colorado Industries should encourage manufacturing to
produce only as much equipment as the installation department needs, not to produce as much as it can.
Under these circumstances, it would not be a good idea to evaluate and compensate manufacturing workers
on the basis of their productivity.
19.31
Deyanira Barbosa
10/12/2011 4:28:08 PM
#1
a) Calculate the average amount of time that an order for Z39 will wait in line
before it is processed.
AOWT = 50 x 80 x 80______
2 x (5000 – (50 x 80))
AOW T= 320,000
2000
AOWT = 160 per order for Z39
b) Average manufacturing lead time per order
AMLT = Average order wait time x average order manufacturing time
AMLT = 160 + 80
AMLT = 240 hrs.
#2
a) Average amount for an order received
AOWT = (50 x 80 x 80) + (25 x 20 x 20)
2 x (5000 – ( 50 x 80) – (25 x 20))
AOWT = 320,000 + 10,000
2 x (5000 – (4000 – 500))
AOWT = 330,000
1000
AOWT = 330 hrs.
b) Average manufacturing lead time per order for each product.
AMLT = AOWT + AOMT
Product Z39
330 + 80 = 410 hours
Product Y28
330 + 20 = 350 hours
RE:
19.31
Instructor Louviere
10/13/2011 2:27:12 PM
Comments?
19-31.docx
RE:
19.31
1.
Alvin Larkins
10/15/2011 7:08:44 AM
Average waiting time for an order of Z39:
[average number of orders x (manufacturing time)^2]/2 x [annual capacity-( average number of
orders x manufacturing time)]=
[50x(80)^2]/2 X [5,000-(50X80)]=320,000/2,000=160 hours per order
2.
Average waiting time for Z39 and Y28:
(Annual average number Z39 ×Manufacturing time Z392)+(Annual average numberyY28
×Manufacturing timeY28 2/
2 × Annual machine
Manufacturing
capacity
–
time per order
Annual
Manufacturing
average number ×
of orders of Z39
Annual
–
time per order
average number
of Z39
of orders of Y28
of Y28
[(50x6,400)+(25x400)]/2x[5,000-(50x80)-(25X20)]=330,000/1,000=330 hours
Average manu lead time for Z39= 330+80=410 hours
Average manu lead time for Y28= 330+20=350 hours
19.27
10/12/2011 10:10:25 PM
Jason Hall
Here is my 19.27
19-27.txt
2026
10/13/2011 3:24:46 AM
Janet Knowlden
Scenario
1
Annual demand (packages)
2
234,000
Cost per purchase order
$
Carrying cost per package per year
$11.70
Quantity (packages) per purchase order
Number of purchase orders per year
3
234,000
81
4
234,000
$
81
$
$11.70
5
234,000
81
234,000
$
$11.70
81
$
$11.70
81
$11.70
900
1,500
1,800
2,100
2,700
72,900
121,500
145,800
170,100
218,700
Annual relevant ordering costs
Annual relevant carrying costs
Annual total relevant costs of ordering and carrying
inventory
19.35
$57,510
Deyanira Barbosa
$73,386
$94,076
10/13/2011 11:12:15 AM
1) Should Aradee accept the contractor offer?
Selling price per table
DM costs per tablet
Outside contracting cost per tablet
Throughput contribution per tablet purchased
Benefit if Aradee accepts offer
$83,430
$1.00
$0.40
$0.12
$0.48
$9360
$116,370
×
19,500 tablets X .48 = $9360
2) Aradee should reject the offer because mixing operations have no avoidable costs.
3)
Increase sales
$10000
Incremental cost per month
$7000
Savings
$3000
2026
Thomas Carter
10/14/2011 7:00:59 AM
20-26
Sales (packages)
234,000
Ordering cot per purchase order
$81.00
Annual carrying costs per package
$11.70
#1
Scenario
1
Annual demand (packages)
2
234,000
3
234,000
Cost per purchase order
$
81
Carrying cost per package per year
$11.70
$
4
234,000
81
$
$11.70
5
234,000
81
$
$11.70
234,0
81
$11.70
Quantity (packages) per purchase order
900
1,500
1,800
2,100
Number of purchase orders per year
260
156
130
111
Annual relevant ordering costs
$21,060
$12,636
$10,530
$9,026
Annual relevant carrying costs
$5,265
$8,775
$10,530
$12,285
$
$26,325
$21,411
$21,060
$21,311
$
Annual total relevant costs of ordering and carrying inventory
EOQ = SQRT(2 x 234,000 x $81) / $11.71
1800
#2
Ordering cost per purchase order is reduced to $49.00
$49.00
EOQ = SQRT (2 x 234,000 x $49) / $11.71
1400
2,7
Scenario
1
Annual demand (packages)
2
234,000
3
234,000
Cost per purchase order
$
49
Carrying cost per package per year
$11.70
$
4
234,000
49
$11.70
$
5
234,000
49
$11.70
$
234,0
49
$11.70
Quantity (packages) per purchase order
900
1,500
1,400
2,100
Number of purchase orders per year
260
156
167
111
2,7
Annual relevant ordering costs
$12,740
$7,644
$8,190
$5,460
Annual relevant carrying costs
$5,265
$8,775
$8,190
$12,285
$
$18,005
$16,419
$16,380
$17,745
$
Annual total relevant costs of ordering and carrying inventory
Annual cost benefit of new system # 2
$4,680
Training costs
$2,000
$2,680
20-26.xlsx
RE:
2026
10/14/2011 6:06:41 PM
Daniel Arriagada
Demand (units) (D)
Cost per purchase order (P)
Annual carrying cost per package (C)
Order quantity per purchase order (units) (Q)
Number of purchase orders per year (D
Annual ordering costs (D Q)
Q)
P
Annual carrying costs (QC 2)
Total relevant costs of ordering and carrying
inventory
1
234,0
00
$
81.00
$
11.70
900
260.0
0
$21,0
60
$
5,265
$26,3
25
2
3
4
5
234,00 234,00 234,00 234,00
0
0
0
0
$
$
$
$
81.00 81.00 81.00 81.00
$
$
$
$
11.70 11.70 11.70 11.70
1,500 1,800 2,100 2,700
156.00
$12,63
6
$
8,775
$21,41
1
130.00 111.43 86.67
$10,53
$
$
0 9,026 7,020
$10,53 $12,28 $15,79
0
5
5
$21,06 $21,31 $22,81
0
1
5
1.- to get the EOQ we must use this formula the Square root of 2x234,00x$81/$11.70 = 1,800
packages
2.- Koala Blue’s ordering costs will be reduced to $49 per purchase order. Calculate the new
EOQ and the new annual relevant costs of ordering and carrying inventory
we use the same formula above, but change the 81 for 49 Square Root of
2x234,000x$49/$11.70 = 1,400 packages
The new annual relevant costs of ordering inventory is $8,190 234,000/1,400X$49 = $8,190
The new annual relevant costs of carrying inventory is $8,190 1,400/2x$11.70 = $8,190
the new annual relevant costs of ordering and carrying inventory is $16,380
3.- Liv Carrol estimates that Koala Blue will incur a cost of $2,000 to train its two purchasing
assistants to use the new Mona Lisa system. Help Liv Carrol present a case to upper
management showing that Koala Blue will be able to recoup its training costs within the first
year of adoption.
Total relevant costs at EOQ (from Requirement 2)
Annual cost benefit over old system ($21,060 – $16,380)
Training costs
Net benefit in first year alone
1937
Instructor Louviere
Please post your work for this problem here.
$16,380
$ 4,680
2,000
$ 2,680
10/15/2011 5:50:03 AM
RE:
1937
Patricia Neal-Williams
10/15/2011 7:02:40 AM
1. Failures in account receivables would be the uncollected debts from customers
and the delay in receiving payments on time
2. Prevention activities that could reduce failures in account receivables
management
a. Run credit checks on customers by salesperson, based on company credit
policy
b. shipping the correct copier to the customer
c. Supporting installation of the copier and answering customer questions or
concerns
d. Sending the correct invoice, with the correct amout, address to the customer
promptly
e. Follow up with the customer to ensure the machine is operating corectly and if
they have any issues
f. Offer the customer discounts to encourage early payoff of equipment.
RE:
19- Instructor Louviere
37
10/16/2011 3:19:49 AM
Comments?
19-37.docx
RE:
19- Dominique Fryer
37
10/16/2011 8:49:49 AM
Patricia, you forgot to call up the biggest baddest person you can find
and have him go knock on the customers door to intimidate it out of
them. Haha. Just incase the rest of those things did not work. Well we
deal with account receivable issues all of the time and the best way to
get results is consistency. If you show the customer that you know that
they owe you and that you are not just going to forget about it most of
the time they will pay up. Try emails, if that does not get results then
use phone calls, then you could use the regular mail with notices that
have big red letters on them. When customers see this happening they
get uncomfortable. That may not be good for future business with them
but if they are already not paying then you might not want to be doing
anymore business with them anyways.
2029
Ellen LaChance
10/15/2011 7:05:12 AM
20-29
Effect of management evaluation criteria on EOQ model.
Computers 4 U is an online company that sells computers to individual consumers.
The annual demand for one model that will be shipped from the northeast
distribution center is estimated to be 500,000 computers. The ordering cost is $800
per order. The cost of carrying a computer in inventory is $50 per year, which
includes $20 in opportunity cost of investment. The average purchase cost of a
computer is $200.
Required
1.
Compute the optimal order quantity using the EOQ model.
square root of (2 x 500,000 x $800)/$50 = $16,000,000
= 4,000 quantity
2.
Compute the number of orders per year and the annual relevant total
cost of ordering and holding inventory.
D/(EOQ) = 500,000/4,000 = 125 deliveries
RTC = (500,000 x $800)/4,000 + (4,000 x 50)/2 =
RTC = 100,000 + 100,000
RTC = $200,000
3.
Assume that the benchmark that is used to evaluate distribution center
managers includes only the out-of-pocket costs incurred (that is,
managers’ evaluations do not include the opportunity cost of investment
tied up in holding inventory). If the manager makes the EOQ decision
based upon the benchmark, the order quantity would be calculated using
a carrying cost of $30 not $50. How would this affect the EOQ amount
and the actual annual relevant cost of ordering and carrying inventory?
Square root of (2 x 500,000 x $800)/$30 = 5,164 quantity
Number of deliveries (500,000/5164) = 97 deliveries
RTC = (500,000 x $800)/5,164 + (5,164 x 30)/2 =
RTC = 77,459.34 +77,460
RTC = $154,919.34
4.
What will the inconsistency between the actual carrying cost and the
benchmark used to evaluate managers cost the company? Why do you
think the company currently excludes the opportunity costs from the
calculation of the benchmark? What could the company do to encourage
the manager to make decisions more congruent with the goal of
reducing total inventory costs?
The inconsistency between the actual carrying cost and the benchmark
used to evaluate managers cost the company $45,080.66.
I think the company excludes the opportunity costs for the calculation of
the benchmark because it brings down their relevant total costs for
deliveries.
The company could encourage the manager’s to make decisions more
congruent with the goal of reducing total inventory costs by making sure
they understand the difference in computing these costs and the impact
it will have on the bottom line. They may also want to pay bonuses
based on these differences.
RE:
2029
Instructor Louviere
Comments?
10/16/2011 3:29:43 AM
20-29.docx
RE:
20- Deborah Kieffer
29
10/16/2011 10:45:05 PM
20-29 Effect of management evaluation criteria on EOQ model.
Computers 4 U is an online company that sells computers to individual
consumers. The annual demand for one model that will be shipped from
the northeast distribution center is estimated to be 500,000 computers.
The ordering cost is $800 per order. The cost of carrying a computer in
inventory is $50 per year, which includes $20 in opportunity cost of
investment. The average purchase cost of a computer is $200.
Required
1. Compute the optimal order quantity using the EOQ model: EOQ =
sqrt (2 * 500,000 * $800) / $50 = 4,000 units
2. Compute the number of orders per year and the annual relevant total
cost of ordering and holding inventory:
Number of Orders per Year = 400,000 / 4,000 = 125 orders
Relevant Cost of Ordering: (500,000 / 4,000) * $800 = $100,000
Holding Inventory (Carrying Cost): (4,000 / 2) * $50 = $100,000
Total Relevant Cost: $100,000 + $100,000 = $200,000
3. Assume that the benchmark that is used to evaluate distribution center
managers includes only the out-of-pocket costs incurred (that is,
managers’ evaluations do not include the opportunity cost of investment
tied up in holding inventory). If the manager makes the EOQ decision
based upon the benchmark, the order quantity would be calculated using
a carrying cost of $30 not $50. How would this affect the EOQ amount
and the actual annual relevant cost of ordering and carrying inventory?
EOQ = sqrt (2 * 500,000 * $800) / $30 = 5,164 units
Relevant Cost of Ordering: (500,000 / 5,164) * $800 = $77,459
Holding Inventory (Carrying Cost): (5,164 / 2) * $50 = $129,100
Total Relevant Cost: $77,459 + $129,100 = $206,559
4. What will the inconsistency between the actual carrying cost and the
benchmark used to evaluate managers cost the company? Why do you
think the company currently excludes the opportunity costs from the
calculation of the benchmark? What could the company do to encourage
the manager to make decisions more congruent with the goal of
reducing total inventory costs?
Total Relevant Costs using the benchmark will be $6,559 higher
than using actual costs for evaluation.
RE:
20- Richard Burger
29
1. EOQ=
√2*500000*800/=
2. # of orders per year = D/EOQ
500000/4000=
Total relevant costs = (DP/Q)
Total relevant carrying costs=
(QC/2)
RTC =
2027
10/16/2011 9:22:06 PM
Dawn Baker
4000
125
500000*800/400=
100000
4000*50/2=
100000
100000+100000=
200000
10/15/2011 9:57:14 PM
Here are what I think are the answers to 20-27 for number's 1 and 2:
1.
Use the EOQ model to determine the optimal number of pairs of shoes per order.
EOQ = The square root of 2 x D(Demand) x P(Relevant ordering cost per purchase order) / C (Relevant
carrying cost of one unit in stock for the time period of D or one year)
EOQ = SR 2 x 120,000 x 250 / 2.40 = SR 60,000,000 / 2.40 = SR 25,000,000
EOQ = 5,000
2.
Assume each month consists of approximately 4 weeks. If it takes 1 week to receive an order, at what
point should warehouse OR2 reorder shoes?
Reorder Point = # or units sold per unit of time x Purchase order Lead Time
If there are 5,000 shoes per order and 2,500 are sold per week, with 1 week lead time needed, then a new
order should be placed when inventories reach 2,500, so that the 5,000 packages will be ordered and
received when inventories reach zero.
RE:
2027
10/16/2011 3:30:18 AM
Instructor Louviere
Comments?
20-27.docx
2033
10/15/2011 11:19:59 PM
Samantha Lack
Backflush costing and JIT production. The Acton Corporation
manufactures electrical meters. For August, there were no beginning
inventories of direct materials and no beginning or ending work in
process. Acton uses a JIT production system and backflush costing
with three trigger points for making entries in the accounting system:
■ Purchase of direct materials—debited to Inventory: Materials
and In-Process Control
■ Completion of good finished units of product—debited to
Finished Goods Control
■ Sale of finished goods
Acton’s August standard cost per meter is direct material, $25; and
conversion cost, $20. The following data apply to August
manufacturing:
Direct materials purchased
$550,000
Number of finished units manufactured
21,000
Conversion costs incurred
$440,000
Number of finished units sold
20,000
Required
1. Prepare summary journal entries for August (without
disposing of under- or overallocated conversion costs). Assume
no direct materials variances.
PART B1
Inventory: Raw materials and in process
control
Debit
550,000
Accounts payable control
Conversion costs control
550,000
440,000
Various accounts
Finished goods inventory
440,000
945,000
Inventory: Raw materials and in process
control
525,000
Conversion costs allocated
Cost of goods sold
Credit
420,000
900,000
Finished goods inventory
900,000
Inventory: Raw materials and in process
control
Purchase of raw materials
550,000
Standard raw material cost
525,000
25,000
Conversion costs control
Conversion costs incurred
440,000
440,000
Conversion costs allocated
Standard conversion cost
420,000
420,000
Cost of goods sold
Cost of goods sold
900,000
900,000
RE:
2033
Instructor Louviere
10/16/2011 3:31:06 AM
Comments?
20-33.docx
RE:
20- Samantha Lack
33
10/16/2011 6:30:50 PM
Looks like I missed a step on the last part, might have been helpful if I had put it in T
balance formatting as you did. I think I was supposed to subtract cost of goods sold
900,000 from Finished Goods Inventory of 945,000 and that balance of 45,000 falls
under Finished Goods control. Does that sound right?
1938
Instructor Louviere
Comments?
19-38.docx
10/16/2011 3:21:02 AM
Summary
Instructor Louviere
10/16/2011 3:31:57 AM
Class:
Everything is going well. Please continue working the problems.
Daniel
20 30 Lisa Marie Johnson
10/16/2011 10:08:51 PM
Effect of EOQ ordering on supplier costs. IMBest Computers supplies computers to Computers
4 U. Terry Moore, the president of IMBest, is pleased to hear that Computers 4 U will be ordering
500,000 computers. Moore has asked his accounting and production departments to team up and
determine the best production schedule to meet Computers 4 U’s desired delivery schedule.
Assume that the computers would be ordered in batches of 2,000 and that there would be 250
orders annually. Because Computers 4 U’s employees work a 5-day work week for 50 weeks a
year, they would expect to receive an order every day. They have developed the following two
production alternatives:



A. IMBest could produce the 10,000 units demanded per week (2,000 × 5) in one large
run on Mondays. Shipments would be made each day. If this option is chosen then
IMBest would only have to set up the machines once a week, but would incur carrying
cost to hold the computers in inventory until Computers 4 U’s desired delivery date.
B. IMBest could rearrange its production schedule during the week and produce 2,000
computers each day of the week, totaling 10,000 computers per week. Shipments would
be made at the end of each production day. If it chooses this alternative, then it will incur
setup costs every day, but carrying costs would be negligible and are assumed to be zero.
1. If setup costs are $1,000 per setup and carrying costs are $50 per computer per year,
what would be the annual cost of each alternative?
Set up cost = cost per setup × annual setups
A: $1,000 × 50 setups = $50,000
B: $1,000 × 250 setups = $250,000
Carrying cost = average inventory level × carrying cost
A: (10,000/2) × $50 = $250,000
B: $0 (computers are only shipped on the day they are made)
Total cost
A: $50,000 + $250,000 = $300,000
B: $250,000 + $0 = $250,000